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GTAP Resource #1477

"Vertical Market Structure, Commodity Exports and Trade Reform"
by Mccorriston, Steve, Richard Sexton and Ian Sheldon

In the analysis of commodity markets, comparatively little attention is paid to the fact that commodity exports from developing countries are intermediates that form inputs into the food processing and retail sectors in developed countries. These industries are often characterised by high levels of concentration such that the vertical structure of commodity markets can be more appropriately characterised as successive oligopoly. This has lead many commodity exporting countries to argue that the market access to developed country markets and the prices they correspondingly receive is determined by market structure characteristics of the downstream food sector. Moreover, the problem of successive oligopoly may also coexist with oligopsony power that is an additional determinant of commodity prices in exporting countries. These issues have been highlighted by policy makers and international organisations yet there has been little attempt to deal formally with these issues.

In this paper, we set out a framework that explicitly accounts for the vertical structure of commodity markets where oligopoly and/or oligopsony power may characterise any or all stages of the downstream food chain. As we show, if the downstream sectors are imperfectly competitive, this has important implications for how economists should model commodity markets. For example, with oligopoly power in the downstream stages, the derived demand curve facing commodity producers will be the perceived marginal revenue function that reflects the nature of competition in downstream markets rather than the consumer demand function as is commonly assumed. This perceived marginal revenue function will be an important determinant of prices received in the commodity exporting country and access to developed country markets. Similarly, if oligopsony power is present, the focus should be on the perceived marginal outlay function rather than the supply function assumed in competitive markets.

By characterising commodity markets in a way that explicitly accounts for vertical market structure, we can explore trade policy issues facing developing country commodity exporters. Specifically, we focus on the reduction of tariffs in developed countries, the key point being that the impact of tariff reform on developing country commodity exporters is determined by the market structure characteristics of the downstream sectors. We show that the impact of trade reform is likely to be different compared to the competitive benchmark that is commonly assumed. Moreover, the impact of market structure on commodity exporters may also be influenced by the nature of the trade policy instrument used. We highlight the effects of vertical market structure and trade reform with simulated examples. We also comment on avenues for future research that arise by characterising commodity markets using the framework outlined.

Resource Details (Export Citation) GTAP Keywords
Category: 2004 Conference Paper
Status: Published
By/In: Presented at the 7th Annual Conference on Global Economic Analysis, Washington DC, USA
Date: 2004
Created: Mccorriston, S. (4/30/2004)
Updated: Bacou, M. (5/26/2004)
Visits: 1,593
No keywords have been specified.

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